UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended: MARCH 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ..................to................
Commission File Number: 0-15905
BLUE DOLPHIN ENERGY COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 73-1268729
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 TRAVIS, SUITE 2100, HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
(713) 227-7660
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
----- --------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
6,020,051 SHARES, PAR VALUE $.01 PER SHARE, OUTSTANDING AT MAY 7, 2001
1
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements of Blue Dolphin Energy
Company and subsidiaries (the "Company") included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of management, reflect
all adjustments necessary to present a fair statement of operations,
financial position and cash flows. The Company follows the full cost method
of accounting for oil and gas properties, wherein costs incurred in the
acquisition, exploration and development of oil and gas reserves are
capitalized. The Company believes that the disclosures are adequate and the
information presented is not misleading, although certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations.
2
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000
------------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash $ 3,376,491 $ 2,071,682
Trade accounts receivable 3,308,521 2,406,751
Funds escrowed for abandonment 1,506,017 1,485,728
Prepaid expenses 425,515 127,913
------------- -------------
Total Current Assets 8,616,544 6,092,074
Property and Equipment, at cost:
Oil and Gas properties, including $430,782 of
unproved leasehold cost at March 31, 2001
and December 31, 2000, respectively
(full-cost method) 28,280,564 28,032,211
Onshore separation and handling facilities 1,583,428 1,583,610
Land 850,000 930,500
Pipelines 2,155,451 4,845,975
Other property and equipment 402,383 397,683
------------- -------------
33,271,826 35,789,979
Accumulated depletion, depreciation
and amortization (30,229,053) (30,444,622)
------------- -------------
3,042,773 5,345,357
Deferred federal income tax 244,444 244,444
Acquisition and development costs - Petroport 1,918,541 1,885,219
Other Assets 483,358 345,861
------------- -------------
Total Assets $ 14,305,660 $ 13,912,955
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 3,498,137 $ 1,557,850
Current portion of long term debt - 218,412
Notes payable - related parties - 2,000,000
Accrued expenses and other liabilities 1,499,358 927,347
------------- -------------
Total Current Liabilities 4,997,495 4,703,609
Other non-current liabilities - 550,000
Minority interest 1,299,040 1,196,479
Common Stock 60,201 60,167
Additional Paid-in Capital 25,768,727 25,775,417
Accumulated Deficit (17,819,803) (18,372,717)
------------- -------------
Total Liabilities and
Stockholders' Equity $ 14,305,660 $ 13,912,955
============= =============
See accompanying notes to consolidated financial statements.
3
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Three Months
Ended March 31,
2001 2000
------------- -------------
Revenue from operations:
Oil and gas sales $ 1,790,852 $ 1,035,709
Pipeline operations 322,198 470,846
Operating fees - 78,226
------------- -------------
REVENUE FROM OPERATIONS 2,113,050 1,584,781
Cost of operations:
Pipeline operating expenses 150,738 240,993
Lease operating expenses 333,764 283,588
Gain on sale of assets (1,417,626) -
Change in abandonment estimate 1,000,000 -
Depletion, depreciation, and amortization 649,012 456,270
General and administrative 629,569 498,535
------------- -------------
COST OF OPERATIONS 1,345,457 1,479,386
------------- -------------
INCOME FROM OPERATIONS 767,593 105,395
Other income (expense):
Interest and other expenses (165,240) (23,895)
Interest and other income 53,121 3,124
------------- -------------
INCOME BEFORE INCOME TAXES 655,474 84,624
Minority interest (102,560) (31,786)
Provision for income taxes - -
------------- -------------
Net income $ 552,914 $ 52,838
============= =============
Earnings per common share-basic $ 0.09 $ 0.01
============= =============
Earnings per common share-diluted $ 0.09 $ 0.01
============= =============
Weighted average number of common shares outstanding
and dilutive potential common shares:
Basic 6,016,829 5,950,880
============= =============
Diluted 6,036,437 6,020,721
============= =============
See accompanying notes to consolidated financial statements.
4
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Three Months
Ended March 31,
2001 2000
------------- --------------
OPERATING ACTIVITIES
Net income $ 552,914 $ 52,838
Adjustments to reconcile net income to net cash provided by
operating activities:
Depletion, depreciation and amortization 649,012 456,270
Minority interest 102,560 29,283
Gain on sale of assets (1,417,626) -
Change in abandonment estimate 1,000,000 -
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable (901,770) (299,628)
(Increase) in prepaid expenses and other asssets (297,602) (38,895)
Abandonment costs incurred (1,388,185) -
(Decrease) increase in accounts payable, accrued
expenses and other current liabilities 1,962,300 (161,421)
------------- --------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 261,603 38,447
INVESTING ACTIVITIES
Purchases of property and equipment (927,242) (20,203)
Exploration and development costs (235,330) -
Net proceeds from sale of assets 4,625,000 -
Funds escrowed for abandonment costs (20,289) (14,625)
Development costs - New Avoca (59,997) (81,737)
Development costs - Petroport (36,367) (26,889)
Other (77,500) -
------------- --------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 3,268,275 (143,454)
FINANCING ACTIVITIES
Payments on borrowings (2,218,412) (100,633)
Other (6,657) -
------------- --------------
NET CASH USED IN
FINANCING ACTIVITIES (2,225,069) (100,633)
------------- --------------
INCREASE (DECREASE) IN CASH 1,304,809 (205,640)
CASH AT BEGINNING OF YEAR 2,071,682 1,166,730
------------- --------------
CASH AT MARCH 31, $ 3,376,491 $ 961,090
============= ==============
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ 98,500 $ 13,267
============= ==============
See accompanying notes to consolidated financial statements.
5
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 2001
1. RELATED PARTY TRANSACTIONS
In December 1999, the Company issued a $1,000,000 convertible promissory note
to Harris A. Kaffie, a director of the Company. This convertible promissory
note originally due June 1, 2000 was extended to March 31, 2001, bore
interest at 10% per annum, and was convertible into common stock at $6.00 per
share. This convertible promissory note and accrued interest of $64,361 were
paid in January 2001
The Company issued three convertible promissory notes in 2000 totaling
$1,000,000; two in the principal amount of $200,000 each on May 25, 2000 and
July 6, 2000, issued to Ivar Siem, Chairman of the Company, and one in the
principal amount of $600,000 on November 30, 2000, issued to TI A/S,
beneficially controlled by Ivar Siem. These convertible promissory notes and
accrued interest of $32,790 were paid in January 2001. The convertible
promissory notes were due March 31, 2001, bore interest at the rate of 10%
per annum and were convertible into common stock at the rate of $6.00 per
share.
2. CONTINGENCIES
In December 1999, American Resources received approximately $4.5 million from
Blue Dolphin Exploration Company for American Resources Offshore, Inc.
("American Resources") common stock representing a 75% ownership interest,
and $24.2 million from Fidelity Oil Holdings Inc. ("Fidelity Oil") for an 80%
interest in its Gulf of Mexico assets. American Resources senior secured debt
was held by Den norske Bank ("Den norske"). Den norske sold the senior debt
to the Company for the right to receive a possible future payment if the
cumulative net revenues received by American Resources and Fidelity Oil
attributable to American Resources proved oil and gas reserves in the Gulf of
Mexico as of January 1, 1999, exceed $30.0 million during the period January
1, 1999 through December 31, 2001. If that occurs, Den norske will be
entitled to receive an amount equal to 50% of the net revenues in excess of
$30.0 million during that three-year period. If any contingent amount becomes
payable to Den norske, 80% will be paid by Fidelity Oil and 20% will be paid
by American Resources. The payment, if any, is due on March 15, 2002.
American Resources estimates that it is probable that a payment to Den norske
will be due based upon these terms and current market conditions. The Company
has provided for a liability to Den norske in the amount of $700,000 at March
31, 2001.
On May 8, 2000, American Resources, a 77% owned subsidiary of the Company,
and its former Chief Financial Officer, were named in a lawsuit in the United
States District Court for the Southern District of Texas, Houston Division,
styled H&N GAS AND HOWARD ENERGY MARKETING, L.L.C. V. AMERICAN RESOURCES
OFFSHORE, INC. ET AL (Case No H-00-1371). The lawsuit alleges, among other
things, that H&N Gas ("H&N") was defrauded by American Resources in
connection with gas purchase options and gas price swap contracts entered
into from February 1998 through September 1999. H&N alleges unlawful
collusion between American Resources' prior management and the then president
of H&N, Richard Hale ("Hale"), to the detriment of H&N. H&N generally alleges
that Hale directed H&N to purchase illusory options from American Resources
that bore no relation to any physical gas business and that American
6
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(CONTINUED)
Resources did not have the financial resources and/or sufficient quantity of
gas to perform. H&N further alleges that American Resources and Hale colluded
with respect to swap transactions that were designed to benefit American
Resources at the expense of H&N Gas. H&N further alleges civil conspiracy
against all the defendants. H&N is seeking approximately $6.2 million in
actual damages plus treble damages, punitive damages, prejudgment interest
and attorneys' fees against American Resources directly. As a result of its
conspiracy allegation, H&N also contends that all defendants are jointly and
severally liable for over $62.0 million dollars in actual damages plus treble
damages, punitive damages, prejudgment interest and attorneys' fees. American
Resources intends to vigorously defend this claim.
As a result of the decision to cease operating activities in the Buccaneer
Field, the Company's leases in or on the Buccaneer Field terminated in
January 2001. The Company must plug and abandon all remaining wells and
remove platform facilities within one year from the termination of the
leases. In the first quarter of 2001, the Company removed its remaining wells
at a cost of approximately $1.4 million. Removal of the platform facilities
is expected to take place in the second half of 2001 at a cost estimated to
be $5.0 million. The Company has increased its estimate of cost of plugging
and abandonment of the Buccaneer Field by $1.0 million from December 31,
2000. The Company has $1.5 million in funds escrowed to pay for some of these
costs.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operations or cash flows.
3. EARNINGS PER SHARE
The Company applies the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), Earnings per Share. SFAS No. 128 requires
the presentation of basic earnings per share ("EPS") which excludes dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of shares of common stock outstanding for the period.
SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on the
face of the income statement and requires a reconciliation of the numerators
and denominators of basic EPS and diluted EPS.
The following table provides a reconciliation between basic and diluted
earnings per share:
7
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(CONTINUED)
Weighted
average
common shares
outstanding
and dilutive Per
potential share
Net Income Common Shares Amount
----------- ------------- --------
Three Months ended March 31, 2001
Basic earnings per share $552,914 6,016,829 $ 0.09
Effect of dilutive stock
options 19,608 -
----------- ------------- --------
Diluted earnings per share $552,914 6,036,437 $ 0.09
=========== ============= ========
Three Months ended March 31, 2000
Basic earnings per share $ 52,838 5,950,880 $ 0.01
Effect of dilutive stock
options - 69,841 -
----------- ------------- --------
Diluted earnings per share $ 52,838 6,020,721 $ 0.01
=========== ============= ========
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), was issued in
June 1998 by the Financial Accounting Standards Board. SFAS 133 establishes
new accounting and reporting standards for derivative instruments and for
hedging activities. This statement requires an entity to establish at the
inception of a hedge, the method it will use for assessing the effectiveness
of the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. Those methods must be consistent with the
entity's approach to managing risk. Certain provisions of SFAS 133 were
amended by SFAS 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an amendment of Statement 133". SFAS 133, as
amended, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company adopted SFAS 133 effective January 1, 2001.
Adoption of SFAS 133, as amended, did not have an impact on the Company's
consolidated financial position or the results of operations.
5. SALE OF ASSETS
On January 22, 2001, the Company sold its 50% interest in the Black Marlin
Pipeline System to affiliates of the Williams Companies, Inc. for
approximately $4.6 million. The Black Marlin Pipeline System includes a
75-mile gas and condensate gathering line with related shore facilities
servicing the High Island Area, offshore Texas (the "Black Marlin Pipeline")
and the recently
8
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(CONTINUED)
constructed 3-mile lateral pipeline extending from High Island Block A-5 to
an interconnection into the Black Marlin Pipeline in High Island Block A-6
(the "A-5 Lateral")
This disposition was consummated, in part, through a sale of all of the
outstanding capital stock of Black Marlin Pipeline Company (formerly an
indirect wholly owned subsidiary of the Company) the owner of a 50% interest
in the Black Marlin Pipeline, pursuant to a Purchase and Sale Agreement dated
January 12, 2001 (the "Stock Purchase Agreement") among Black Marlin Energy
Company, a wholly owned subsidiary of the Company, MCNIC Offshore Pipeline &
Processing Company ("MCNIC"), WBI Southern, Inc. ("WBI") and Williams Field
Services Group, Inc. The Company received $3.6 million for the outstanding
capital stock of Black Marlin Pipeline Company for a gain of $1,305,534.
The remaining part of this disposition was consummated through the sale of
the A-5 Lateral owned 50% by Blue Dolphin Pipe Line Company, a wholly owned
subsidiary of the Company ("BDPL"), pursuant to a Purchase and Sale Agreement
dated January 12, 2001, among BDPL, MCNIC, WBI and Williams Field Services
- -Gulf Coast Company, L.P. The Company received $1.0 million for its interest
in the A-5 Lateral, for a gain of $112,092.
6. BUSINESS SEGMENT INFORMATION
The Company's income producing operations are conducted in two principal
business segments: oil and gas exploration and production and pipeline
operations. Intersegment revenues consist of transportation, general
processing and storage fees charged by certain subsidiaries to another for
natural gas and crude oil transported through the Blue Dolphin Pipeline
System. The intercompany revenues and expenses are eliminated in
consolidation. Information concerning these segments for the three months
ended March 31, 2001, and March 31, 2000 is as follow:
Depletion,
Operating depreciation,
Intersegment income amortization and
Revenues(3) revenues (loss)(1) impairment (2)
---------- ------------ ------------- -----------------
Three months ended March 31, 2001:
Oil and gas exploration and
production, and operating fees $ 1,790,852 - (442,651) 1,584,142
Pipeline operations(3) 322,198 1,478,499 53,807
Other - (268,255) 11,063
---------- ------------ ----------------
Consolidated 2,113,050 - 767,593 1,649,012
Other expense (112,119)
------------
Income before income taxes
655,474
Three months ended March 31, 2000:
Oil and gas exploration and
production, and operating fees $ 1,115,435 1,500 244,567 360,987
Pipeline operations(3) 477,331 6,485 51,270 88,280
Other (7,985) (190,442) 7,003
---------- ------------ ----------------
Consolidated 1,584,781 - 105,395 456,270
Other expense (20,771)
------------
Income before income taxes 84,624
9
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(CONTINUED)
March 31, December 31,
2001 2000
------------------ ------------------
Identifiable assets:
Oil and gas exploration
and production $ 4,931,471 $ 4,164,299
Pipeline operations 7,526,903 8,958,876
Other 1,847,286 789,780
------------------ ------------------
Consolidated $ 14,305,660 $ 13,912,955
1. Consolidated income from operations includes $257,193 and $175,405
in unallocated general and administrative expenses, and
unallocated depletion, depreciation and amortization of $11,063
and $7,003 for the three months ended March 31, 2001 and 2000,
respectively.
2. Pipeline depletion, depreciation and amortization includes a
provision for pipeline abandonment of $4,935 for both the three
months ended March 31, 2001 and 2000, respectively. Oil and gas
depletion, depreciation, amortization and impairment includes a
provision for abandonment costs of $6,495 for the three months
ended March 31, 2000. In addition the Company recorded an expense
of $1,000,000 for the three months ended March 31, 2001, as a
result of a change in the estimate of cost associated with the
Buccaneer Field abandonment.
3. Pipeline revenues includes $49,640 and $231,449 for both the three
months ended March 31, 2001 and 2000 respectively, from the Black
Marlin Pipeline System. Pipeline operations includes $50,107 and
$169,501 of operating expenses and depreciation for both the
three months ended March 31, 2001 and 2000, respectively, from the
Black Marlin Pipeline System.
10
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain of the statements included below, including those regarding future
financial performance or results or that are not historical facts, are
"forward-looking" statements as that term is defined in the Section 21E of
the Securities Exchange Act of 1934, as amended. The words "expect," "plan,"
"believe," "anticipate," "project," "estimate," and similar expressions are
intended to identify forward-looking statements. Blue Dolphin Energy Company
(referred to herein, with its predecessors and subsidiaries, as "Blue
Dolphin" or the "Company") cautions readers that any such statements are not
guarantees of future performance or events and such statements involve risks
and uncertainties that may cause actual results and outcomes to differ
materially from those indicated in forward-looking statements. Some of the
important factors that could cause actual results to vary from
forward-looking statements are discussed in our Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on January 11,
2001 under the caption "Risk Factors." The Risk Factors section of this
Registration Statement is incorporated by reference into this report. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. The Company undertakes no duty to
update these forward-looking statements. Readers are urged to carefully
review and consider the various disclosures made by the Company which attempt
to advise interested parties of the additional factors which may affect the
Company's business, including the disclosures made under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report.
The following is a review of certain aspects of the financial condition and
results of operations of the Company and should be read in conjunction with
the Condensed Consolidated Financial Statements included in Item 1. of this
report.
RECENT DEVELOPMENTS
The Company previously announced a gas discovery in High Island Area Block
A-7, in the Gulf of Mexico. The Company acquired the block in 1995, and owns
an 8.9% reversionary working interest after lease-wide payout is first
achieved. Production from the first well in the block began in September 2000
and is currently producing at a rate of 20 Mmcf of gas per day. Two
additional successful discovery wells were drilled and are expected to be on
production in the second or third quarter of 2001. A fourth well is currently
being drilled. Before the Company is assigned its working interest, the
initial working interest owners must achieve lease-wide payout of their
investment.
During the second quarter of 2000, American Resources' Board of Directors
formed a special committee for the purpose of evaluating the possible
exchange of its' outstanding common stock and preferred stock for shares of
the common stock of the Company. The special committee is made up of American
Resources' directors who are not affiliated with the Company. In April 2001,
American Resources special committee met with management of the Company to
discuss a possible transaction. Currently discussions are
ongoing.
11
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the Company's financial position at March 31,
2001 and December 31, 2000 (amounts in thousands):
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
AMOUNT % AMOUNT %
------ -- ------ --
Working capital $ 3,619 39 $ 1,388 15
Property and equipment, net 3,043 33 5,345 58
Other noncurrent assets 2,646 28 2,476 27
-------- --- -------- ---
Total $ 9,308 100 $ 9,209 100
======== === ======== ===
Other non-current liabilities $ - - $ 550 6
Minority interest 1,299 14 1,196 13
Stockholders' equity 8,009 86 7,463 81
-------- --- -------- ---
Total $ 9,308 100 $ 9,209 100
======== === ======== ===
The change in the Company's financial position from December 31, 2000 to
March 31, 2001, was primarily due to the sale of its' 50% interest in the
Black Marlin Pipeline System.
Historically, the Company has relied on the proceeds from financing
activities and the sale of assets to supplement its capital requirements. In
the three months ended March 31, 2001("current period"), the Company financed
its activities through both the sale of assets and operating activities.
The Company's future cash flows are subject to a number of variables,
including the level of production, utilization of its pipeline systems,
utilization of the Company's services by third parties and commodity prices
among others. The Company believes that it will have sufficient cash flow
from operations, private equity or debt financing activities and the sale of
assets to meet its obligations and operating needs for the current year.
However, the Company cannot be assured that operations and other capital
resources will provide cash in sufficient amounts to maintain planned levels
of capital expenditures. The net cash provided by or used in our operating,
investing and financing activities is summarized below:
THREE MONTHS ENDED
MARCH 31
-------------------------
2001 2000
----------- -----------
Net cash provided by (used in):
Operating activities $ 262 $ 38
Investing activities 3,268 (143)
Financing activities (2,225) (101)
----------- -----------
Net increase (decrease) in cash $ 1,305 $ (206)
=========== ===========
12
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The Company's cash flow from operating activities increased by $0.2 million
in the current period compared to the three months ended March 31, 2000
("previous period"), due primarily to the increased cash flow generated from
the Company's American Resources oil and gas properties.
Cash flow provided by investing activities during the current period included
the proceeds from the sale of the Company's interest in the Black Marlin
Pipeline System of approximately $4.6 million. Cash flow used in investing
activities included the construction of a new offshore platform currently
being installed to operate the Blue Dolphin Pipeline of approximately $0.9
million, and exploration and development costs associated with an American
Resources oil and gas property of approximately $0.2 million.
Cash flow used in financing activities during the current period consisted of
the payment of promissory notes in the principal amount of approximately $2.2
million, see Item 1., Note 1., Related Party Transactions.
On January 22, 2001, the Company and its partners sold the Black Marlin
Pipeline System for $7.3 million and the recently constructed High Island
Block A-5 pipeline for $2.0 million to Williams Field Services; $3.6 million
and $1.0 million, respectively, net to the Company's interest. The Black
Marlin System accounted for 15% of the Company's revenues in the previous
period.
In November 2000, the Company elected to abandon the Buccaneer field due to
adverse developments in the field. The Company reached an agreement with
Tetra Applied Technologies, Inc. ("Tetra"), to plug and abandon the wells
located in the Buccaneer Field. In the current period the remaining wells in
the Buccaneer Field were plugged and abandoned for approximately $1.4
million. In addition, Maritech Resources, Inc. ("Maritech") an affiliate of
Tetra purchased an adjacent lease from Apache Corporation on which the
Company provided production operating services to Apache Corporation. In
December 2000, as a result of the Company's plans to abandon the Buccaneer
Field platform facilities, the Company and Maritech terminated the operating
agreement. A new platform is currently being installed in Galveston Block 288
to operate and maintain the Blue Dolphin Pipeline System, as well as handle
the production from the Maritech lease. The Blue Dolphin Pipeline System is
currently tied into and operated from the Buccaneer Field platforms. The
Company expects that the new platform and its connection to the Blue Dolphin
Pipeline System will be completed in the second quarter of 2001, at an
estimated cost of $1.5 million net to the Company's 50% interest in the Blue
Dolphin Pipeline System. The removal of the Buccaneer Field platform
facilities is expected to begin in the second half of 2001. As a result of
cost estimates recently received, the Company has increased its estimate to
remove the Buccaneer Field platforms from $4.3 million to $5.0 million.
The Company will partially finance the well plugging and abandonment and the
removal of the Buccaneer Field platform facilities totaling $6.4 million, by
using its escrow fund for abandonment obligations of approximately $1.5
million. The Company expects to finance the remaining abandonment costs, and
the installation of the new Blue Dolphin Pipeline System platform from the
proceeds received from the sale of the Black Marlin Pipeline System and from
working capital and the private placement of debt or equity securities.
13
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
In December 1999, the Company entered into an agreement with Fidelity Oil to
manage their interest in the oil and gas properties acquired from American
Resources for $40,000 per month. This amount was intended to reimburse the
Company for the cost of the services provided. The agreement expired in
December 2000 and provided for continuation thereafter on a year to year
basis unless terminated by either party. Fidelity Oil terminated this
agreement effective January 31, 2001.
The Company's reserves and future net revenues reported at December 31, 2000
reflect capital expenditures totaling $898,900 for the year ending December
31, 2001. Management will continue to evaluate its capital expenditure
program based on, among other things, field reservoir performance,
availability and cost of drilling and workover equipment, and demand and
prices obtainable for the Company's production, as well as availability of
capital resources. There can be no assurance that reserves will be developed
as currently planned. At March 31, 2001, the Company incurred capital
expenditures totaling $235,330, most of which, $222,745 was associated with
the development of its interest in the American Resources' Galveston Block
418 property.
In December 1999, American Resources was paid approximately $4.5 million by
Blue Dolphin Exploration for American Resources common stock, representing a
75% ownership interest, and $24.2 million by Fidelity Oil for an 80% interest
in its' Gulf of Mexico assets. The proceeds were used by American Resources
to retire certain indebtedness. The indebtedness included American Resources
senior secured debt totaling approximately $51.2 million to Den norske bank
("Den norske"). Den norske sold the senior debt for $27.0 million and a
contingent future payment if the cumulative net revenues received by American
Resources and Fidelity Oil attributable to American Resources proved oil and
gas reserves in the Gulf of Mexico as of January 1, 1999, exceed $30.0
million during the period January 1, 1999, through December 31, 2001. If that
occurs Den norske will be entitled to receive an amount equal to 50% of the
net revenues in excess of $30.0 million during that three-year period. If any
contingent amount becomes payable to Den norske, 80% will be paid by Fidelity
Oil and 20% will be paid by American Resources. The payment, if any, is due
on March 15, 2002. American Resources estimates that it is probable that a
payment to Den norske will be due based upon current market conditions. The
Company has provided for a liability to Den norske in the amount of $700,000
at March 31, 2001.
Although the Company's Loan Agreement expired in December 2000, the Company
believes that it has, or can obtain, adequate capital to continue to meet its
anticipated capital requirements. In the past, the Company's requirements
have been financed by the disposition of certain assets, for example,
interests in its pipelines, by borrowings under the Loan Agreement, private
placements of its equity and debt securities, and investments by its
directors. However, there can be no assurance that the Company will be able
to continue to obtain financing from these sources or sell assets on
commercially acceptable terms. The Company's inability to finance its capital
requirements may adversely affect its results of operations, timing for major
pipeline expansions, growth in oil and gas prospect generation activities,
developmental midstream projects and other projects.
14
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS
The Company reported net income for the current period of $552,914, compared
to net income of $52,838 reported for the previous period. The difference in
net income is primarily due to the gain on the sale of the Black Marlin
Pipeline System of $1,417,626 offset in part by a current period increase to
the Company's Buccaneer Field abandonment obligations of $1,000,000.
REVENUES:
Current period revenues from oil and gas sales increased by $755,143, from
those of the previous period. Revenues from the American Resources properties
increased by $864,214 in the current period compared to the previous period
due to a 63% net increase in commodity prices on million cubic feet of gas
equivalent basis ("Mmcfe"), resulting in increased revenues of $691,300 and
an increase in production volumes of 19% on an Mmcfe basis, resulting in a
$172,914 increase in revenues. The increase in oil and gas sales in the
current period does not reflect revenues from the Buccaneer Field which was
$110,071 in the previous period.
Current period revenues from pipeline operations decreased by $148,648 or 32%
from the previous period. The decrease was due to the sale of the Black
Marlin Pipeline System on January 22, 2001. The Black Marlin Pipeline System
provided revenues of $231,449 for the previous period compared to $49,640 for
the current period. During the current period, average daily gas volumes
transported by the Blue Dolphin Pipeline System increased by 6% resulting in
an increase in pipeline revenues of $33,160.
The Company did not have current period revenues from operating fees due to
the termination of the operating agreement with Maritech in December 2000.
COSTS AND EXPENSES:
Current period pipeline operating expenses decreased by $90,255 or 37% from
the previous period. The decrease was primarily due to the sale of the Black
Marlin Pipeline System on January 22, 2001. The Black Marlin Pipeline System
had pipeline operating expenses of $116,997 for the previous period compared
to $33,462 for the current period.
Current period depletion, depreciation and amortization increased $192,742,
from the previous period. The increase was due to a 19% increase in
production volumes resulting in increased depletion of $251,302 offset in
part by a decrease of $40,077, resulting from the sale of the Black Marlin
Pipeline System. The Company recorded depletion expense of $18,483 in the
previous period for the Buccaneer Field.
General and administrative expenses for the current period increased $131,034
from the previous period. The increase was primarily due to an increase in
legal expense associated with the H&N lawsuit of approximately $74,000 and
the termination of the Management Services Agreement between the Company and
Fidelity Oil, whereby the Company managed Fidelity Oil's interest in the oil
and gas assets it acquired from American Resources in December 1999,
resulting in an increase of approximately
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
$80,000. The management fees received from Fidelity Oil had been recorded as
a reduction to general and administrative expenses.
The Company recorded a change in the estimated costs associated with the
Buccaneer Field abandonment of $1,000,000 in the current period. During the
current period, the Company plugged and abandoned the remaining Buccaneer
Field wells for a total cost of approximately $1.4 million. In addition the
Company received cost estimates totaling $5.0 million to remove the Buccaneer
Field platforms. At December 31, 2000, the Company's provision for
abandonment was approximately $5.4 million, thus the Company has recorded an
adjustment to the estimated abandonment cost of $1.0 million in the current
period.
Interest and other expense increased $141,345 in the current period due to
the $150,000 increase in the provision for the contingent payment due to Den
norske Bank, see Item 1. Note 2. Contingent Payment.
16
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET PRICE
The Company is exposed to market risk, including adverse changes in commodity
prices and interest rates as discussed below.
COMMODITY PRICE RISK- The Company produces and sells natural gas, crude oil, and
natural gas liquids. As a result, the Company's financial results can be
significantly affected if these commodity prices fluctuate widely in response to
changing market forces. The Company does not use derivative products to manage
commodity price risk.
INTEREST RATE RISK- The Company currently has no short-term or long-term debt
with floating interest rates, and is not subject to risk of interest rate
changes.
17
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 8, 2000, American Resources, a 77% owned subsidiary of the Company,
and its former Chief Financial Officer, were named in a lawsuit in the United
States District Court for the Southern District of Texas, Houston Division,
styled H&N GAS AND HOWARD ENERGY MARKETING, L.L.C. V. AMERICAN RESOURCES
OFFSHORE, INC. ET AL (Case No H-00-1371). The lawsuit alleges, among other
things, that H&N Gas ("H&N") was defrauded by American Resources in
connection with gas purchase options and gas price swap contracts entered
into from February 1998 through September 1999. H&N alleges unlawful
collusion between American Resources' prior management and the then president
of H&N, Richard Hale ("Hale"), to the detriment of H&N. H&N generally alleges
that Hale directed H&N to purchase illusory options from American Resources
that bore no relation to any physical gas business and that American
Resources did not have the financial resources and/or sufficient quantity of
gas to perform. H&N further alleges that American Resources and Hale colluded
with respect to swap transactions that were designed to benefit American
Resources at the expense of H&N Gas. H&N further alleges civil conspiracy
against all the defendants. H&N is seeking approximately $6.2 million in
actual damages plus treble damages, punitive damages, prejudgment interest
and attorneys' fees against American Resources directly. As a result of its
conspiracy allegation, H&N also contends that all defendants are jointly and
severally liable for over $62.0 million dollars in actual damages plus treble
damages, punitive damages, prejudgment interest and attorneys' fees. American
Resources intends to vigorously defend this claim.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
A) No Exhibits
B) Form 8-K - On January 31, 2001, the Company filed a
current report on Form 8-K dated January 22, 2001, with
respect to the sale of its interest in the Black Marlin
Pipeline System. The items reported in such current
report were Item 2 (Acquisitions or Dispositions of
Assets) and Item 7 (Financial Statement and Exhibits).
18
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By: BLUE DOLPHIN ENERGY COMPANY
Date: May 14, 2001 /s/ Michael J. Jacobson
-------------------------------------
Michael J. Jacobson
President and Chief Executive Officer
/s/ G. Brian Lloyd
-------------------------------------
G. Brian Lloyd
Vice President, Treasurer
19